Cost Basis

• Seller chooses which specific lots to sell
• Most flexible — allows tax-loss harvesting and gain management
• Requires identifying the specific shares at the time of sale
• Must maintain adequate records linking each sale to specific purchase lots
• Broker confirmation required for adequate identification

Average Cost

• Cost basis = total cost of all shares ÷ number of shares
• Only permitted for mutual fund shares and certain dividend reinvestment plans under US rules
• Some jurisdictions (e.g., UK "Section 104 pool") use average cost for all shares
• Once elected for a fund, applies to all shares in that fund

Calculation Process

Step 1: Build the Lot Inventory

For each acquisition, record:

• Date acquired
• Quantity
• Price per unit
• Total cost (including commissions and fees)
• Acquisition type (purchase, gift, inheritance, exercise, dividend reinvestment)

Step 2: Process Dispositions Chronologically

For each sale/disposition:

1. Identify which lots to match (based on chosen method)
2. Calculate proceeds: sale price × quantity - commissions/fees
3. Calculate basis: cost of matched lots (including any adjustments)
4. Determine gain/loss: proceeds - adjusted basis
5. Classify as short-term (held ≤ 1 year) or long-term (held > 1 year)
6. Check for wash sale violations (see below)

Step 3: Produce Summary

Present results as a structured table:

Then provide totals:

• Total short-term gain/loss
• Total long-term gain/loss
• Net overall gain/loss

Wash Sale Rules

A wash sale occurs when you sell a security at a loss and buy a "substantially identical" security within 30 days before or after the sale (61-day window).

Effects

• The loss is disallowed for the current period
• The disallowed loss is added to the basis of the replacement shares
• The holding period of the replacement shares includes the period of the original shares

What Triggers a Wash Sale

• Buying the same stock or security
• Buying a call option on the same stock
• Buying a substantially identical mutual fund
• Acquiring shares through dividend reinvestment
• Purchases in an IRA or other related accounts (under US rules)

What Does NOT Trigger a Wash Sale

• Selling stock and buying bonds of the same company
• Selling one S&P 500 index fund and buying a different provider's S&P 500 fund (debatable — exercise caution)
• Selling at a gain (wash sales only apply to losses)

Calculation Adjustment

When a wash sale occurs:

1. Disallow the loss on the original sale
2. Add the disallowed loss to the basis of the replacement shares
3. Adjust the holding period of the replacement shares

Corporate Actions

Stock Splits

• Forward split (e.g., 2:1): quantity doubles, basis per share halves, total basis unchanged
• Reverse split (e.g., 1:5): quantity reduced, basis per share increases proportionally
• Fractional shares from splits: treat as a small sale at the split-adjusted basis

Stock Dividends

• Non-taxable stock dividends: allocate original basis across old + new shares
• Taxable stock dividends: new shares have basis equal to their fair market value on distribution date

Mergers and Acquisitions

• Tax-free reorganization: basis carries over from old shares to new shares (adjusted for any boot received)
• Taxable acquisition: treat as a sale of old shares and purchase of new shares
• Cash + stock deals: allocate basis proportionally; cash portion may trigger gain recognition

Spin-offs

• Allocate basis between parent and spin-off shares based on relative fair market values on the distribution date
• IRS or the company often publishes the allocation percentages

Cryptocurrency Specifics

General Rules

• Crypto is treated as property (not currency) in most jurisdictions
• Every disposal (sale, trade, spend) is a taxable event
• Trading one crypto for another is a taxable event (unlike a like-kind exchange for real estate)

Special Situations

• Hard forks: New coins received have basis of $0 (or fair market value at time of receipt if reported as income)
• Airdrops: Generally taxable as ordinary income at fair market value when received; that FMV becomes the cost basis
• Staking rewards: Taxable as ordinary income when received; FMV at receipt = basis
• Mining: Taxable as ordinary income (possibly self-employment income); FMV at receipt = basis
• DeFi yields / liquidity pools: Complex — may be ordinary income, may involve multiple taxable events
• NFTs: Treated as property; may be classified as collectibles (higher long-term rate in some jurisdictions)
• Lost/stolen crypto: Theft losses have limited deductibility (check current rules)

Tracking Challenges

• Use transaction-level matching, not wallet-level
• Account for network fees (gas) as part of cost basis or as a separate deductible expense
• Reconcile across wallets and exchanges
• Watch for internal transfers that are NOT taxable events

Output Format

Always present cost-basis calculations with:

1. Assumptions stated: Method used, any judgment calls made
2. Lot-level detail: Show which lots were matched to which sales
3. Summary table: Gains/losses by short-term and long-term
4. Tax impact estimate: If rates are known, estimate the tax owed
5. Caveats: Note any areas of uncertainty or where professional review is recommended